Question

Vaughn Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers’ demand for its product. Vaughn issues a(n) $848,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 11%. The company will pay off the note in five $169,600 installments due at the end of each year over the life of the note.

Prepare the journal entry at the date of purchase.

Prepare the journal entry at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.

Prepare the journal entry at the end of the second year to record the payment and interest.

Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Answer 1

1	Equipment a/c	$             626,824.13
	Discount on notes payable	$             221,175.87
	To Notes Payable		$             848,000.00
2	Notes payable a/c             Dr	$             169,600.00
	Interest on notes payable	$               74,155.00
	To bank		$             169,600.00
	To Discount on notes payable		$               74,155.00
3	Notes payable a/c             Dr	$             169,600.00
	Interest on notes payable	$               50,294.65
	To bank		$             169,600.00
	To Discount on notes payable		$               50,294.65
4	Depreciation a/c	$               62,682.41
	To accumulated Depreciation		$               62,682.41